Global profitability management

in the Ecco group

The ECCO group has implemented a change
in the company’s finance management

The ECCO group has implemented a change in the company’s fi-

nance management from traditional management of legal and or- Facts on ECCO
ganisational units towards increased focus on global profitability
management. Today, the group has established a global overview
which makes the actual profitability at EBIT level visible in all ma- ECCO is a family-owned group
with a leading position on the
terial dimensions, such as customers, products, distribution chan- market for casual shoes. In 2006,
nels, etc. the ECCO group had a total turno-
ver of DKK 4.5 bn, which is almost
600 million more than the year be-
In 2004, the situation in the ECCO group was that profitability was falling fore. In addition, the result before
and costs were increasing. “It was a worrying situation and it was made taxes has more than doubled from
DKK 350 million in 2005 to almost
worse by the fact that it was difficult for us to identify exactly where in our DKK 709 million in 2006.
value chain profitability was falling and which specific business activities
“We are delighted with the
were driving the cost increases. It was necessary to establish a model
results because they reflect a
which would be able to measure profitability across our value chain”, says handsome growth in all our areas.
Annemette Nøhr, CFO. The growth in the USA is 20 %,
whereas it has been 40% in East-
ern Europe and 8% in Western
The vision for profitability management at the ECCO group was established Europe. That is great”, says Mi-
kael Thinghuus, Deputy Managing
from the beginning: Director, to the daily newspaper
Børsen on 23 March 2007.
• Establishment of global profitability management
He points out that the growth in
• Possibility of reporting and analysing profitability from multiple dimen- turnover in 2007 will be at least
sions, such as branding divisions, products, regions, customers, chan- 10 %. This means that in 2007,
the ECCO group will reach a
nels of distribution, etc. turnover of around DKK 5 bn. Back
• Reporting must include forecast, budget and realised profitability with in 2003, when the ECCO group
reached a turnover of DKK 3.2 bn,
possibility of both explaining and acting.
the management set up an ambi-
• Profitability data, analyses and reporting must be an integrated part of tious goal to double the turnover
the ECCO group’s standard IT systems. before 2013. This goal will have
been achieved already in 2010 if
the group succeeds in increasing
The vision still manages the development of and the work within profit- the turnover by 10%.
ability reporting.

From cow to shoe

The ECCO group is a global group which owns and runs a – for this line of
business – unusually large part of the value chain. “We hold on to the posi-

“With the profitability project we
wanted to move part of the decision-
making basis from belief to knowled-
ge”, says Annemette Nøhr, CFO.
tion which is almost unique in the shoe business that we management the
entire value chain from cow to shoe”, according to the annual report from
2006. The group includes an extensive and complex value chain with head-
quarters in Tønder and Bredebro. Here we find people with the responsibi-
lity for design, branding, products and concepts, and group functions such
as IT, finance, HR, logistics and legal affairs. In addition there are a total
of 11 business units: the leather group, five shoe factories, and five sales
regions. In 2006, the group sold 14.8 million pairs of shoes and had a turn-
over of *DKK 4.5 bn and a profit before taxes of DKK 709 million.
From belief to knowledge
It was difficult for us to combine strategy with economy because of lack of
transparency regarding where the money was earned and what drove the
costs”, says Annemette Nøhr, CFO, and adds:
“With the profitability project we wanted to move part of the decision-
making basis from belief to knowledge. This was a success, and today we
are able to report on the profitability in relevant dimensions of our value
chain, and at the same time we can simulate the future profitability in con-
nection with different scenarios.”
The profitability project
The ECCO group and Valcon chose to let the profitability project be driven
by a number of hypotheses set up by the key stakeholders of the busi-
ness. The aim of this approach was to create commitment and ensure the
balancing of expectations regarding the management information to be
brought about by the model.

The hypotheses might be that:

• Own production is more profitable on the bottom line than outsourcing.

• Overspecialised products are less profitable than other products.
• A given product division produces low profitability at EBIT level.
• Distribution through partner shops is more profitable than distribution
through own shops.
• Costs of servicing retail customers vary considerably.
• 30% of the products contribute 70% of the profitability at EBIT-level.

Procedure
A total of 14 key stakeholders were identified and interviewed by the
project group. The interviews led to a plan in which the ECCO group al-
located employee resources to a project group which then carried out an
analysis together with Valcon on the basis of the method Activity Based
Costing (ABC).

The actual analysis involved setting up conditions, identifying activities

and distribution keys, collecting data and developing tools. The model was
based partly on existing data and partly on a collection of data among the
employees regarding the distribution of their workday on different activi-
ties.

All data were incorporated in Valcon’s ABC Calculator which is a specially

developed database on the basis of Microsoft technology. The database is
able to handle the relatively large amounts of data and works as a strong
ABC calculator which is able to distribute costs into the desired areas.

“The vision for the profitability management was a wish for close integra-
tion with the ECCO group’s standard IT systems, but traditional finance sys-
tems are not designed to calculate profitability as the ECCO group wants to
see it. This means that we are working on an ongoing basis to improve the
interfaces between our finance system and the ABC database,” says Jørn
Olesen, Head of Business Controlling.
Permanent part of business rhythm
Profitability reporting is today a permanent part of the ECCO group’s busi-
ness rhythm and decision-making basis. It includes a number of reports to
the management at the head office and to the five sales regions about the
profitability development on their specific markets. In addition, there are
a number of reports to the rest of the organisation, including in particular
the branding organisation which is in charge of the development of new
products.

Reporting to branding is made on an ad hoc basis and at various times

during a product’s life cycle. The early reporting is made already at the first
presentation of the collection for the coming season. “Profitability report-
ing is made before the product is presented to the sales organisations, and
this enables us to act at a very early stage of the product’s life cycle,” says
Jørn Olesen.

Results
The profitability reporting from contribution margin level to EBIT level is
today a central element in managing the global shoe group and is a supple-
ment to the existing management reporting to ensure that the organisation
makes the right business decisions.

The results of the new model include:

• Global insight into the profitability within product divisions, single

products, sales regions, customers, distribution channels, etc. – and a
visualisation of where in the value chain money is earned or lost.
• Adjustment of prices on some markets. Today, a previously unprofit-
able product group on an important market has managed to contribute
favourably to the ECCO group earnings.
• Simulation of profitability, break-even analyses, etc.
• The ECCO group has combined volume considerations with profitability
considerations.
• All parts of the group are now better able to assess and challenge the
profitability of future collections.
• The profitability project has also led to increased focus on essential
areas such as freight charges, discount structures, and other heavy
costs.
• The profitability project has visualised inappropriate aspects of the
ECCO group’s ERP system and processes, and it has therefore been
necessary to optimise process and IT in some areas, for example
product calculations.
“Another material result of the profitability project is the common acknowl-
edgement that business activities started in one region may have material
consequences for the activities in the other business units – and therefore
on the total profitability at group level. Previously, that did not appear from
the traditional profitability reporting,” says Annemette Nøhr.

Strategic simulation of business development

The primary benefit from the profitability model is that the management
in the ECCO group now has multi-dimensional transparency in the profit-
ability structure in the total value chain and is therefore able to simulate
the costs generated by future initiatives. On the basis of the model, the
management can now also implement analyses which can in advance as-
sess the effect of efforts and plans to improve profitability. This may be
analyses of for example the following questions:

• How will growth rates within regions and brands affect the total profit-
ability for the ECCO group at EBIT level?
• How many pairs of shoes must be sold in a specific product group in
order to reach break-even, also measured at EBIT level?
• What is the effect on the bottom line of concrete initiatives on a mar-
ket (product mix, price increases, reallocation of sales resources, etc.)?
• How will the allocation of product capacity affect profitability?
• What is the effect on profitability of the use of distributors rather than
own sales channels?
• Which costs will a new product lead to for the value chain?

“Generally, the analysis confirmed our own, partly subjective, impression

of the situation; but it also did away with some of our assumptions. There
is no doubt that the work has made our financial navigation more precise.
Finally – and this is clearly the most important result – the profitability
analysis has created a much wider business understanding of our value
chain across ECCO”, says Annemette Nøhr.

Popular tool
According to Jørn Olesen, the ABC model has been easy to market in-
ternally at ECCO. Together with his team he has staged a road show to
explain the new model, and all parts of the organisation have easily been
able to understand the opportunities of the model.

“The profitability model is an additional dimension in our decision-mak-

ing process which makes it easier for many people in our organisation to
distinguish between profitable and less profitable initiatives. We now have
a more objective basis for our decisions”, says Jørn Olesen, adding, “the
profitability model also means that today the finance department is much
more of a proactive sparring partner for the business than before.”

Status for the vision

Today, the vision has largely been implemented. Profitability reporting has
given us full transparency at contribution margin level and at EBIT level,
and today the results are used proactively to improve earnings in the ECCO
group.

Still remaining – and we are working on this – are primarily improvements

within the process and IT integration area to make working with the model
as flexible as possible. Of course, a profitability model must be maintained “The profitability model also means
on an ongoing basis to make sure that it will always support the needs of that today the finance department is
the business. Changes must for example be made to the model in case of much more of a proactive sparring
changes to such aspects as customer segmenting and/or value chain. partner for the business than before”
says Jørn Olesen, Head of Business
Increased need for global management Controlling.
ECCO and a few other large businesses lead the way for the largest groups
in Danish trade and industry regarding full transparency in their profitabi-
lity structure.
How many pairs of shoes must be sold
to achieve break-even at EBIT level?
“Businesses like ECCO, Novo Nordisk, Novozymes and most recently the
LEGO group have a clear competitive advantage because of the global
profitability management. They have implemented a change in paradigm
in their work methods by using new financial business models based on
Activity Based Costing principles. In these businesses, decision-makers at
all levels consider the net effect of any behaviour on the company’s bot-
tom line”, says Søren Holm, Valcon Director. Søren Holm has more than
15 years’ experience in financially orientated consulting work at top level
for some of the largest businesses in the country, and he has implemented
more than 70 management projects for both medium-sized businesses and
groups in the absolute heavyweight class.
He points out that because of globalisation, numerous small and medium-
sized Danish businesses are today facing the challenges faced by the large
groups 5 – 10 years ago, i.e. being able to create full cost transparency in
the global value chain.
“Management risks making the wrong decisions because it does not have
the necessary information to be able to calculate consequences across the
business. The primary reason is that even today’s advanced finance man-
agement systems are simply not suited to manage profitability in global
businesses,” he says.
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